Posts Tagged ‘Indonesia’

As regular readers will know, I’m a bull on Indonesia. But one problem that occurs regularly there is the inability of the Indonesian government to refrain from changing or trying to change the rules of the game. Very unsettling.

We see it in the regular calls by the government to re-negotiate the commercial gas contracts that S’pore has with Indonesia*. We also see it in the plan mooted last year by the central bank to limit bank ownership to 49%. This would mean Temasek, all three local banks, and M’sian banks having to cut back their holdings. So far nothing concrete has emerged.

Now Indonesia will force foreign firms to sell down stakes in mines by the 10th year of production, with domestic ownership to be at least 51%, in a move likely to hurt existing miners and scare off potential investors. The new rule is the latest government attempt to extract greater domestic profit from the vast mineral wealth in the world’s top exporter of thermal coal and tin. Indonesia contains some of the world’s richest mineral deposits, such as the Freeport-run Grasberg, the world’s largest gold mine, and its fast-growing mining sector accounts for about 11% of GDP.

The requirement, stated in a regulation on the mining ministry’s website, comes as the government is renegotiating contracts with the leading foreign metals miners in the country, Freeport McMoRan Copper & Gold Inc and Newmont Corp.

To be fair, the rule isn’t a brand new outbreak of resource nationalism. It is ad hoc legislation to fill in holes in a 2009 mining law, which followed 2003 revisions to royalties and 2001 rules on distributing mining revenue. The 2009 law required foreign owners to start divesting after five years of production, but didn’t say by how much. A number has now been provided, but it’s still not clear which existing mines the new terms will affect, if any.

—————-

*S’pore’s new liquefied terminal will be able to handle sufficient imports of the fuel to cover all of the country’s power needs, even if piped gas supply contracts with Malaysia and Indonesia are not renewed, a senior civil servant said a few days ago. It depends on natural gas for around 80% of its power generation needs, with the bulk sourced from Indonesia and Malaysia under long-term contracts.

Also, buyers from Singapore completed the largest number of transactions as Indonesia witnessed a record year for M&A activity.The 12-month M&A activity for Indonesia ended 31 Jan, 2012, saw 78 transactions worth a total of US$9 billion being recorded, with Singapore-based companies completing nine transactions worth US$372 million, according to global risk management company Kroll and M&A intelligence service mergermarket.

The nine transactions completed by Singapore-based buyers were in a diverse range of industries, highlighting the investment potential in Indonesia. Two transactions were in the energy sector, the rest of the deals were in transportation, consumer food, real estate, construction, financial services, internet and e-commerce, and in other services.

Japan was the most prominent country in the South-east Asian nation’s M&A activity in terms of value and volume, with US$1.1 billion across six deals. The largest Japanese transaction of the year was Mitsui Sumitomo Insurance’s US$827 million, 50% stake acquisition in life insurance provider PT Asuransi Jiwa Sinarmas (Sinarmas Life Insurance), according to the report.

Deals by Asia-Pacific buyers accounted for 72% \of Indonesia’s M&A deal count while 28% of bidders were from outside Asia, with US bidders completing the most transactions,

Indonesia is expected to see continued strong M&A activity, particularly in the technology, media and telecommunications, financial services, energy and mining & utilities sectors.

“Investing in emerging markets is always challenging for investors. Indonesia in particular requires deep local insight into the market and potential target companies, as various reforms continue to raise both opportunities and challenges for potential bidders,” said Kroll.

“Many investors interested in Indonesia tend to seek help from local third-party advisers or partners to assist with administrative functions during a transaction. However these intermediaries may not necessarily have sufficient understanding of global anti-corruption legislation. Overlooking such legislation can lead to costly violations for investors in their home markets … investors also need to be aware of other operational pitfalls that may impact their business such as the state of local infrastructure and the integrity of business partners. These risks often vary according to sector.”

Its booming economy also masks its problems with politcal governance and corruption. This is what ISEAS* says about the country in its inaugral ASEAN Monitor dated February 2012

Indonesia

Indonesia is in a period defined simultaneously by stasis and stability. It has yet to move into the next phase of its democratic consolidation, and it is unlikely to do so in 2012.

In fact, several indicators suggest an overall deterioration in earlier democratic achievements. First, the country’s judiciary and police are — and most likely will remain — notoriouslyunpredictable in upholding the rule oflaw. Second, large sections of the bureaucracy are in disarray; they will continue to perform poorly for theforeseeable future. Third, Indonesia’s main political parties have fallen increasingly into internal turmoil over positions of influence and finances.

Those problems and frictions are boundto persist in several important parties in the coming months.

Externally, Indonesia is expected continue playing a fairly minor role despite being the dominant power inSoutheast Asia. This is largely because of the strong emphasis on purely domestic political issues. As the next generalelection and the presidential electionapproach in 2014, all of Indonesia’s political parties will become increasinglypreoccupied with preparations for the polls and the selection of candidates. It must be remembered that an anti-porn bill was introduced in 2008, just before the general election the following year.

The coming months will tell if there is to be a similar populist legislative measure to win conservative votes this time. Overall, it is unlikely that Indonesia’s status as a stable yet static democracy will change substantially during 2012.

Key points: The current consumer boom in Indonesia will continue to mask its problems with corruption. And though Indonesia is less likely to be adversely affected by a global economic slowdownthan other regional countries, will global risk aversion stem the investment inflows it has enjoyed in recent years? Read the rest of this entry »

The Indonesian stock market was the best performer in emerging Asia in 2009 and 2010 when it was up 87% and 46% respectively. So far this year, it is Asia’s second best performer behind the Philippines’ 2.05% rise. It has risen 1.26%. According to Thomson Reuters StarMine, the market is trading at 13.4 times this year’s projected earnings. Thailand is trading at 11 times, Singapore is at 12 times, the Philippines 12.2, Malaysia at 13.3 and the whole of Asia at 10.9.

Indonesia has one of the fastest growing middle classes in the region – up from 80 million five years ago to 130 million now. That’s more than half of this country’s 240 million strong population. That number is expected to grow. By 2020, many think that Indonesia’s middle class will be wealthier than many in Asia.

Largely insulated from the troubles overseas (but remember that China is a big importer of Indonesian exports like themal coal and palm oil) because of strong domestic demand, economists say Indonesia will see growth rates stay stable or possibly even rise next year, at a time when many in the region are cutting their growth forecasts.

So it is not surprising that Indonesian consumers are feeling far more confident about their prospects than ever before, and they consistently rank as some of the most optimistic in Asia about their economic future.

I’m a bull on Indonesia* for all my sins and it hasn’t done me much gd. It is a treacherous place, navigating through opaque regulations, erratic business relationships, changing policies and deeply entrenched corruption.

Nat Rothschild, son of Jacob Rothschild (a semi- retired leading London- based financier), a good dealer-maker and savvy investor has found that out the hard way. He is chairman and a major shareholder of London- listed Bumi plc which owns a 29% stake in Jakarta- listed Bumi Resources, and 75% of Berau. He wrote in early November a very nasty letter to the CEO of both Bumi compaines (same man), complaining that

— despite being heavily in debt, Bumi Resources had US$867m of assets that had nothing to do with its core coal business; and

There are some interesting Indonesian consumption patterns according to a recent report by Indonesia’s Kresna Securities.

It cited a survey by research firm MARS Indonesia saying that discounts and promotions are able to change 67% and 52% of window shoppers into buyers respectively even though they may not have been interested in buying at first.

‘Indonesian consumers are dominated by shop lovers and lifestyle shoppers, who accounted for 54.5% of total consumption in 20.

In my view, a locally-listed Reit that will benefit from these trends is Lippo-Mapletree Indonesia Retail Trust. It is a Singapore-based real estate investment trust with a diversified portfolio of income producing retail and retail-related properties in Indonesia.

Check it out yrself as I can’t say more. I bot some shares earlier this year.

As Asia’s largest net energy exporter, only Malaysia will benefit significantly from higher energy prices. With crude oil, natural gas and palm oil making up almost 30% of total exports, the country is experiencing a significant positive terms-of-trade shock, says Barclays Capital.

It says US$120 oil would add 3.1 percentage points to Malaysia’s current account balance as a percentage of GDP, and 0.9 percentage points to Indonesia’s.

Indon mkt is down 8% this yr after doing 46% last yr, one of world’s best.

Reason: investors are worried that authorities are too complacent abt inflation. The Reuters article also tells us that the mkt collapsed in previous bouts of inflation, though the analysts say this time is different (“They would say that, wouldn’t they?)

So might want to curb yr bullishness on all things Indon* on SGX here.

The Indian stock market has fallen more than 7% from a record high set in November, as investors have grown increasingly concerned about inflation and corruption scandals that have paralyzed the country’s Parliament. The Nifty 50 stock index did close up 1.9 percent on Wednesday, but that came after a six-day losing streak.

I’m still a bull on these countries owning Lippo-Mapletree and Ascendas I (despite it trading above last reported RNAV).

—-

*I missed buying First Reit. I tot it would trade at 0.71 (theoretical price taking into account massive rights issue) for a while. No hurry to buy. In New Yr it moved to juz above its last reported RNAV of 0.76. Sigh. Penny wise, pound foolish.

Seems sophisticated investors are looking beyond the ‘BRIC’ countries (Brazil, Russia, India and China). I’ve seen predictions that by 2020, the “Future 7” (F7) countries (Argentina, Egypt, Indonesia, Mexico, South Africa, Turkey and Vietnam) will account for 1-in-10 global consumers, and per capita disposable income will rise by 52% in real terms. The F7 are characterised by youth and urbanised populations, combined with rising incomes and the expansion of the middle class.

This story, abt the possibility of the Indon authorities seizing Temasek’s assets there, is nothing to get excited about. Someone wants some money. Remember its Money time!

This blogger is bullish on Indonesian. But he has been around long enough to know that Indonesia’s ideas of good governance (public or private) is not benchmarked to global standards. It is uniquely Javanese.

A few years back, a foreign investor was involved in a dispute with the management of a listco. An EGM was called, and the investor’s resolution won the support of the majority of shareholders in a poll vetted by a major international accounting firm.

The next day, the investor read in the papers that he had lost, and management had won, the vote. When he sought an explanation, he was told, “The counters made a mistake”.

A senior US foreign service officer who was based in Indonesia once told me that Indonesian officials had demanded a bribe from him to process an application even though they knew he was a member of the US embassy there. The embassy raised the issue and were told, “Err misunderstanding brudder”. Still, by the time he left for another posting a few years later, his application was being processed.

So now that Temasek has asked the court if a judgement has been issued, sumeone will say, “You mean you never got it? We posted it months ago. We have sent another copy in the mail.”

Nomura says Indonesia’s fundamentals are solid. Growth is strong, inflation is muted, and the central bank aims to keep the rupiah stable. And the government aims to kick-start infrastructure projects by making land acquisition easier.

So GDP growth is expected to grow from an estimated 5.9% this year to 7% next year. Nomura sees a 15 times PE for the equity market next year, with a possible re-rating to as much as 16.5 times PE.

The firm’s top stock picks in Indonesia are infrastructure providers. Commodity companies are also expected to do well. Coal prices are rising even as production volumes improve. A return to normal weather conditions will also boost Read the rest of this entry »

This blog has reported that Indonesia is the new Brazil https://atans1.wordpress.com/2010/03/20/our-neighbour-the-new-brazil/. We should be nice to them but be careful of its bullying tendencies. Indonesia has form in bullying those it thinks are weak. It succeed in East Timor, West Papua, Acheh and Celebes. It failed against M’sia and S’pore.

It seems to be trying again. Sometime back, our very own superhero MightyMind (or MM Lee in real life) told us, “We are buying gas from our neighbours; they are thinking of upping the price in spite of the contract”: confirming Indonesian reports that various Indonesian officials have renewed calls for the country to renegotiate a reduction in the volume of gas sold to Singapore, given Indonesia’s growing domestic gas demand.

E.g. in June, Coordinating Economy Minister Hatta Radajasa was quoted as saying, “I have ordered the Energy Ministry and upstream regulator BPMigas to renegotiate the contracts, though we may not achieve what we want. I don’t want to breach the contracts, but we have to try any possibility.”

Energy and Mines Minister Darwin Zahedu Saleh was quoted in mid-June as saying Indonesia will adopt a government-to-government approach, rather than a business-to-business one, to renegotiate the gas supply deals with Singapore.

Indonesian Vice-President Boediono said in June the government will gradually increase its domestic gas price to try to increase investment in the industry and encourage foreign investors to sell their Indonesian gas domestically rather than export it.

But the government led by the son of MightMind has not gone AWOL. Singapore has already started building a $1.5 billion liquefied natural gas terminal that will starting importing LNG from early-2013, according to MM from Qatar.

The terminal will initially be able to import as much as 490 mscfd of gas, slightly more than the total the three gas pipelines (two from Indonesia and one from Malaya) brings here.

Background info from BT on Indon gas

At present, Sembcorp Gas imports 325 million standard cubic feet daily (mscfd) of natural gas per day from West Natuna in Indonesia under a 22-year deal. This gas goes to major power generators and petrochemical companies here, including Tuas Power, PowerSeraya, ExxonMobil and Ellba Eastern.

From 2011-12, Sembcorp will import an additional 86 million mscfd from Natuna under a second deal that has been struck.

GSPL, a subsidiary of Temasek Holdings, currently imports 350 mscfd of gas daily from Grissik via the Sumatra-Singapore pipeline under a 20-year contract that expires in 2023.

GSPL has recently been in discussions with the production sharing contract holders there, including ConocoPhillips, on a new sales agreement for additional supplies, including for GMR of India’s upcoming Island Power station here.

Both Sembcorp’s and GSPL’s Indonesian piped gas contracts are based on formulas that take into account high sulphur fuel oil prices.

As it is, the Indonesian reports cited a BPMigas official saying the Singapore importers are paying double the amount paid by domestic buyers there.

Obama did it again. The “Canceller-in-chief”, has again postponed his trip to Indonesia. If I were an Ondonesian, I’d be upset. Waz so difficult abt vistiing the Gulf, do a tv special, explain that you have already postponed one trip to Indonesia, https://atans1.wordpress.com/2010/03/20/our-neighbour-the-new-brazil/, and that a second postponement is an insult to the the new Brazil?

And Indonesia is impt — Mark Mobius says so.

Indonesia has a “good” outlook due to its resources and large population, putting the nation in a favorable position to attract investment, Templeton Asset Management Ltd.’s Mark Mobius said.

“Overall we have a positive take on investment opportunities there,” Mobius, who oversees about $34 billion in emerging markets as Templeton Asset Management’s Singapore-based executive chairman, wrote in his blog dated yesterday. “Indonesia has a young, growing population and Jakarta, the capital of Indonesia, is expected to be the largest city in the world within two decades.”

Since August last year, oil prices have stabilised in the US$70 to US$83 range and according to this NYT article, Economists and government officials say that if prices remain in that band, it could benefit the world economy, the future security of energy supplies and even the environment. The price is high enough to drive investment in future oil production and in supplies of alternative energy, they note, but low enough that consumers can bear it.

“It’s a sweet spot,” said Kenneth S. Rogoff, a Harvard professor of international finance. “It’s not too low that it’s crushing demand for renewable energy sources or causing debt and fiscal crises in oil-exporting countries. And it’s not so high that it’s driving African countries deeper into poverty and threatening the recovery in the U.S. and Europe.”

So for us value investors, the issue is avoiding being complacent because, For all the good that stable prices can do, however, no one is willing to predict they will last forever.

“Demand will change; supply will change,” said Christof Rühl, chief economist of BP, the oil company. “The world changes all the time.”

He should ensure that any acquisition in Indonesia, India, Malaysia and Thailand, the countries where DBS says it would look for acquisition opportunities is disciplined in terms of valuation, strategic fit and execution. Investors still remember the Dao Heng fiasco, overpaying and having to take billion dollar impairement charge. And the purchase of POSB was not such a gd deal as anti-government subversives like to imply that it is.

Better still he shld relook at the rationale for these M&A activities.

DBS is Singapore and Hong Kong centric. But, in February, it said it was aiming to have 30 per cent of its revenue from South and South-east Asia, excluding Singapore, 30 per cent from Greater China and 40 per cent from Singapore within five years.

Morgan Stanley estimates that DBS would have to grow at a compounded annual growth rate of 40 per cent a year in South and South-east Asia to achieve its stated target in that region i.e. it would have to grow via acquisitions.

BTW last Friday BT reported that DBS’s CEO had said DBS had identified unnamed acquisition targets in Indonesia which shld worry investors.